Taxation of US Income When Living in the UK I
f you are one of the many Americans living in the UK who are employed by a US employer, you may be wondering just how you will be taxed in both countries. Let’s take a look at the top questions Americans in the UK have about their US and UK tax requirements. 1. How are UK residents and non- residents taxed in the UK? If you are a US person living in the UK, you have the option of being taxed on a worldwide basis or not. For those US citizens living in the UK on a more temporary basis, you can choose to pay on a “remittance basis”, which means you are only taxed on your UK income. Essentially, your US salary would be ‘taxfree’ in the UK—but of course, that’s not tax-free in the US. If you are non-resident, you only pay taxes on UK-based income generative assets, such as UK property, UK broker accounts, UK bank interest, etc. Non-residents are generally those who reside in the UK for less than 183 days per year, but you must also follow the new Statutory Residence Test rules, as well.
18 May 2015
2. How are UK residents taxed in the US? Whether you choose the remittance basis or not, you may be able to exclude your income from US taxation using the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to $100,800 of foreign earned income from US taxation. Even though you are receiving money from a US-based company, you are earning it while physically abroad so it is considered foreign earned. If you periodically return to the US for work, the income you earn while on US soil can NOT be included in the income you offset with the FEIE. Even if all your income will be excluded from US taxation, you are still required to file a US tax return and report the income and your eligibility to use the FEIE. 3. Can the Foreign Tax Credit help offset your US taxes? If you are a resident of the UK and don’t choose the remittance basis, you open your income to UK taxation. The Foreign Tax Credit (FTC) can be used to offset the taxes you may owe by using the taxes already
paid to the UK, dollar for dollar. Example: You earn $120,000 and exclude the first $100,800 with the FEIE, leaving $19,200 of income subject to US taxation. That $19,200 will be taxed at the same US rate as the full $120,000 (as you can’t take the FTC on the portion of income that has already been excluded from your total income). If the UK taxes you paid on that $19,200 is greater than the US taxes on it, you won’t owe the US anything. Since the UK tax rates are generally higher than in the US, you would likely eliminate your US tax liability. You may also be able to use the FTC alone to lower your US tax liability, if you are not eligible or choose not to take the FEIE. This article was written by David McKeegan, CoFounder of Greenback Expat Tax Services, which specializes in the preparation of US expat taxes for Americans living in the UK and around the world. Our UK Chartered Accountant will work alongside your Greenback accountant to prepare your UK taxes. To have Greenback prepare your US and UK taxes, simply visit www.greenbacktaxservices.com/the-american/ to get started and receive a $25 off discount.